‘In many respects the international financial system is stronger than in 1997-98. But in one crucial aspect – the overall strength of the world economy – it is weaker.’

So wrote Ed Crooks and Thomas Catan in the Financial Times (17 July) amid a brief panic in financial circles that Argentina would default on its debts.

Their apparently contradictory statement expressed the anxieties now felt by many mainstream economists.

Four years ago a financial storm started in Thailand which spread to batter down the east Asian, Russian and Latin American economies. But the high priests of the system managed to declare that it was just a temporary squall, since ‘only’ about a third of the world was pushed into slump by it. I remember a former adviser to Thatcher (Patrick Minford) and a former adviser to Gordon Brown (Meghnad Desai) both telling me when I debated with them that Alan Greenspan, head of the US Federal Reserve, had been able to keep it under control simply by lowering interest rates a little.

That storm was not simply financial. It was caused by the way in which east Asian firms rushed to produce things in competition with each other in export markets without paying any regard to the limits of the market. Carried away by this apparent success, financial institutions then poured money into those countries, causing a classic ‘bubble’ – which was then pricked by a sudden fall in the value of the Thai currency.

The impact of the storm on the advanced industrial countries was, however, mainly financial. Institutions which had placed their bets on the east Asian, Russian and Latin American currencies and stock markets lost out. In the process the near collapse of the hedge fund Long Term Capital Management (LTCM) threatened to bring chaos to New York, London and Frankfurt as well as Bangkok, Seoul, Moscow and Buenos Aires. But Alan Greenspan forgot all the rhetoric about free markets as he organised a bail out for LTCM, while the IMF applied the pressure necessary to protect the interest repayments of western moneylenders.

US capitalism was able to go on booming through the turbulence as if nothing had happened. Falling prices for goods from east Asia like electrical equipment and clothing held back inflationary pressures elsewhere. And funds which might have gone to the ‘emerging economies’ poured into US stock markets, the most likely place to yield a quick profit.

So hardly had the mythology about the Asian Tigers collapsed than it was replaced by the mythology of a ‘new paradigm’ ensuring endless crisis-free growth for the US economy. The new technologies associated with the silicon chip, it was claimed, were producing massive advances in productivity which ensured rising profits.

In fact, as I pointed out in Socialist Review while the ‘new paradigm’ was still all the rage, the rising profits were a result of a very old fashioned increase in the rate of exploitation of American workers, despite an increase in the working year of over 160 hours – a month – per worker. But even these profits were still lower then in the long boom of the 1960s, and certainly not enough to justify the high level of US stock markets, which were reaching levels twice as high as they should have been on the basis of company profitability. American investors were simply betting on profits continuing to rise as they had in the past, without any justification for their actions except that other investors were making the same bet.

There was a get rich quick mood of sheer exuberance which led investors – and the economics professors who turn their prejudices into complicated mathematical formulae – to pretend that what had happened in Asia was of no account. Against that background, companies continued to promise higher profits, and funds continued to pour into the US from everywhere else in the world, allowing it to consume 5 percent more than it produced last year.

In fact, it now seems that at the time of the Asian crisis the real profits of US companies were already in decline. The Economist (23 June 2001) reports,

‘Spectacular growth in profits during the 1990s was partly due to dodgy accounting ... According to Bob Barbera of Hoenig, an investment bank, the stated operating profits of S&P 500 companies rose at a much faster rate than profits measured in the national accounts ... Thus, in the 1990s, profits at S&P 500 companies tripled, but profits recorded in the national accounts merely doubled.’

Firms could get away with this pretence so long as share prices seemed to provide investors with magical capital gains. But the moment anything, however little, upset the upward spiral, disaster was bound to threaten.

The little something was the collapse of the outrageously hyped e-commerce companies, which had risen higher than anything else during the first months of 2000, only to collapse towards the end of the year. Few mainstream commentators recognised what their demise portended. Then just before Xmas it became clear that mainstream new technology companies were also in trouble, and a few people noted that firms like General Motors were not doing very well either. Even so, quarter or half percent cuts in interest rates by Greenspan were enough to restore many capitalist spirits.

Today the overall picture is much harsher. The Economist, which opposed Greenspan’s attempts to boost the US economy at the turn of the year as potentially inflationary, now warns, ‘The world economy is starting to look remarkably, even dangerously, vulnerable.’ The US may have already stumbled into its first recession in a decade, according to the National Bureau of Economic Research. Stephen Welting, an analyst at Salomon Smith Barney in New York, entitled his latest report on the US economy ‘Help! I’ve Fallen and Can’t Get Up’. Even so, Greenspan is trying to keep rich people’s confidence up by saying all that is happening is a V-shaped ‘correction’ – a dip in the economy soon to be followed by new growth at the end of the year. He is hoping that his interest cuts, Bush’s tax cuts and the new spate of military spending associated with the Son of Star Wars programme will provide a boost that the market, left to itself, cannot provide. So much for the neoliberal claims that states play no role.

Meanwhile, ‘emerging’ economies like Argentina, Turkey and Brazil which relied on the US boom to get them out of their last lot of troubles are in a deep mess again. As in 1997-98, these troubles can have a knock-on effect on banks in the US, Germany, Britain and elsewhere. But this time the impact can be much greater, since it will be very difficult for anyone to pretend it is only the financial superstructure and not the industrial core of the system that is in crisis.

Real profits were already in decline at the time of the east Asian crisis